Question

"Treasury bonds paying an 14.0% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually? (Hint: What is the effective annual yield on the bond?")

Answer 1

Answer:

An annual bond should pay 14.49% to be sale at par when issued.

Explanation:

Considering the effective yield on the bond, we should convert the 7% semiannual rate into an annual rate:

$(1+0.07)^{2} - 1 = r_e\\.1449 = r_e$

We get that the ate for an annual bonds to be financially equivalent it should be 14.49%